Throughout the conflict in the Middle East, gold remained in the shadow of other assets amid concerns that rising inflation could prompt the Fed to tighten monetary policy. However, de-escalation is changing the game. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- De-escalation has breathed new life into gold.
- When inflation is high and the Fed holds back, XAU/USD rises.
- Central bank demand is supporting the precious metal.
- Weak employment data would provide an opportunity to build up long positions in XAU/USD.
Fundamental Forecast for Gold Today
Gold’s moment has finally arrived. For a long time, the precious metal remained in the shadow of other assets, losing a fifth of its value since the armed conflict in the Middle East began. The resulting rise in oil prices heightened the risks of accelerating inflation and tighter Fed monetary policy. As a result, the US dollar and Treasury yields climbed, creating strong headwinds for XAU/USD. In early August, everything changed.
As much as Donald Trump wanted to save the global economy, Oman will most likely do it instead. It managed to reach an agreement with Iran on reopening the Strait of Hormuz. Oil supply will increase, Brent prices will fall, and disinflation will return to the US economy. Unsurprisingly, the chances of the Fed keeping rates unchanged in September and through the end of 2026 are rising.
Gold and Oil Performance
Source: Bloomberg.
I suspect consumer price growth will slow less quickly than the FOMC doves would like, but this is unlikely to matter much for gold. When inflation is high, but the Fed remains unfazed, and no monetary tightening is expected, conditions are favorable for gold.
Moreover, the latest WGC report shows that central banks have stepped up their bullion purchases, while capital continues to flow into gold-focused ETFs in Asia. Interestingly, the Bank of Korea plans to increase its reserves through specialized exchange-traded funds, which could provide fresh impetus to further gold purchases.
Capital Flows Into Chinese Gold ETFs
Source: Bloomberg.
In my view, the US-backed deal between Iran and Oman is more durable than the agreement between Tehran and Washington. Donald Trump is impulsive and often changes his mind, while Iran has repeatedly said since the bombings that it will not negotiate with the United States. Oman is a different matter, as it is directly involved in traffic through the Strait of Hormuz.
At the same time, energy prices are not the only source of inflationary pressure. A strong labor market, accompanied by faster wage growth, could make the FOMC more hawkish and increase the likelihood of tighter monetary policy. This would support the US dollar and weigh on gold. Conversely, disappointing employment data would provide a strong argument for the XAU/USD rally to continue.
XAU/USD Trading Plan for Today
Will the precious metal return to record highs? Most likely not this year, as strong speculative demand had driven gold to record highs before the bubble eventually burst. In the longer term, however, anything is possible. For now, US employment data for July that meets or falls short of forecasts could be used as an opportunity to add to gold long positions opened at $4,165 per ounce.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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